Welcome to the group of Bancirio Garcia's Second Quarter 2019 Earnings Release Call. Today's call is being recorded. At this time, I'd like to turn the call over to Paolo Fervira. Please go ahead.
Thank you. Good morning, and welcome to this conference call. I will make a short introduction, and then we will take your questions. Some of the statements made during this conference call will be forward looking statements within the meaning of the Safe Harbor provisions of the U. S.
Federal securities laws and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed. According to private estimates, the Argentine economy recorded at 0.1% year over year contraction during the Q2 of this year compared to a 7.1% year over year contraction in the Q1 of this year. During the first half of twenty nineteen, the primary fiscal surplus amounted to ARS 30,200,000,000 in excess of the ARS 20,000,000,000 target for the period. According to the National Institute of Statistics, the National Consumer Price Index recorded a 22.4% increase during the 1st 6 months of the year. On the monetary front, the Argentine Central Bank expanded the monetary rate by ARS 24,300,000,000 in the 2nd quarter a 1.8% expansion against the Q1.
Meanwhile, the exchange rate averaged ARS 43.72 per dollar in June, a 5.7% increase against the average for March 2019. When compared to June 2018, the FX rate increased 62.3%. In June, the average rate on digital denominated credit sector term deposits for up to 59 days was 49%, almost 9 percentage points above the average recorded last March. Private sector deposits in pesos amounted to ARS 2.4 1,000,000,000, increasing 9.5% during the quarter and 49.5% in the year. Transactional deposits in pesos rose 13.9% during the Q2 and 31.3% in the year.
This was denominated and deposits increased 5.7% in the quarter and picked up 72.3% year over year. As of the end of June, peso denominated loan to credit sector amounted to ARS 1,540,000,000,000, recording a 0.6% increase during the quarter and a 0.2% increase when compared to June 2018. Turning now to Grupo Financiero Alicia. Net income attributable to Grupo Financiero Alicia for the 2nd quarter amounted to ARS 11,600,000,000, 3 16 percent higher than the same quarter of the previous year, mainly due to profits from Banco Alicia for ARS 10,100,000,000 from Parqueta Regionales for ARS 922,000,000 from Sumerikana Holdings for ARS 314,000,000 and from Nalicia Mitaro Fundos for ARS 114,000,000 increased by a net operating income of ARS 109,000,000 and partially offset by personnel and administrative expenses of ARS 52,000,000. This profit represented a 7.3% annualized return on average assets and a 68.9% return on average shareholders' equity compared to 3% and 24.8% a year ago.
For the profit per share amounted to ARS 8 point 11 compared to ARS 1.95 per share for the same quarter of 2018. Going to Banco Alicja, net income for the quarter increased 4.40% from the year ago quarter as a result of a higher net operating income, mainly related to the growth of the net income from financial instruments, partially offset by higher loan loss provisions and interest expenses. Net interest income for the quarter decreased 83% as compared to the same period of 2015, primarily as a consequence of a 2 54% higher interest on term deposits and term investments. This decrease in net interest income was more than compensated with the increase in net income from pension instruments, which was up by ARS 16,000,000,000 from the ARS 1,500,000,000 recorded in the Q2 of 2018. This was a consequence in the increase in results related to a greater volume of Leliq Holdings, together with a higher yield on this instrument.
Profits from gold and foreign currency quotation differences amounted to ARS 2,300,000,000, including a ARS2.2 billion profit from foreign currency trading and were 100 and 98% higher than in the same quarter of last year. Provision for loan losses for the quarter amounted to ARS 3,100,000,000, 215 percent higher than the same quarter of the prior year, mainly due to the evolution of our peers in the consumer portfolio. Personal expenses increased 56% as compared to a year before, in line with the accumulated inflation for the period and mainly due to salary increase agreements with the union. In addition, administrative expenses grew 64%, mainly due to higher fees and compensation for services and higher taxes. The income tax charge was ARS 1,600,000,000, ARS 802,000,000 higher than in the Q2 of last year.
During this quarter, in accordance to the income tax law and to the evolution of the consumer price index, this charge was adjusted by inflation for tax purposes. The bank financing to the private sector reached ARS295,000,000,000 at the end of the quarter, up 21% in the last 12 months, 5% growth for the peso financing and 9% for the financing in U. S. Dollars. And deposits reached ARS 409 1,000,000,000, up 57 percent in a year, with peso denominated deposits growing 54% and U.
S. Dollar deposits 8%. The bank's estimated market share of loans to credit sector was 10.6%, 57 basis points higher than at the end of the year ago quarter, and the market share of deposits from the private sector was 10.7%, recording a 24 basis points increase in the same period. As regards asset quality, the NPL ratio ended the quarter at 4.63 percent, recording a 2 36 basis points deterioration as compared with the 2.27 percent of the Q2 of the prior year. And the coverage of NPLs with allowances reached 108%, up from 103% from a year ago.
As of June 30, 2019, the bank's consolidated convertible capital exceeded by ARS 31,000,000 or 106 percent, the ARS 29,000,000 minimum capital requirement, and the total regulatory capital ratio reached 16.98 percent, increasing by 3 59 basis points from the same quarter of fiscal year 2018. In summary, during the Q2 of 2019, Grupo Financiero Galicia has shown results in a very challenging macro environment, keeping liquidity, solvency and profitability metrics at high levels. Now we are ready to answer the questions that you may have. Thank you.
Thank you. We'll now take our first question from Jason Mollin from Scotiabank. Please go ahead.
Thank you very much. Hi, Pablo. My question is, given the current volatility in the markets that we've seen following the in these days. It's very early, but we've seen your exposure to short term well, in this case, a short term government bonds increase dramatically over time. That's a sector wide phenomenon given the operating environment.
But is that is this a level of the current concept should expect the bank to have about a quarter of its assets in the lease and other debt securities? Thanks.
Hi, Jason. Well, as you said, it's too early to take different actions, mainly because what we saw on last Sunday was the results of primaries. We have 75 days for the elections. Many people are saying that still, Madrid has some probability of being elected. So this, I would say, political uncertainty for the next 75 days is bringing uncertainty and volatility to the FX market that will create some pressure on inflation.
We are very liquid, very well capitalized, and we act, I would say, quickly and very flexible. Lelix are optioned twice a day, so we can, I would say, moderate the amount very quickly? Actually, in a week, we could go from EUR 127,000,000,000 that was the number at the end of June to 0 if we wanted to. But in the Q2, it was our source main source, I would say, of revenues as we were taking term deposits and investing this liquidity in the mix. In terms of FX position, we are hedged.
Last Friday, we were around $15,000,000 to $20,000,000 long, considering the spot position and forward. So really everything is very short term. So we are, I would say, quickly to react or we react quickly to any potential change in any macroeconomic variables. I don't know if the answer was too wide or you want more color on specific decision or variables?
That's helpful on your positioning. It is early. Maybe just some color, additional color on what you're seeing in what you saw yesterday, what the bank saw yesterday and today in the FX market. I guess the spread is very wide. Is the bank are customers going to the bank and transacting?
At what kind of spreads for the Argentine peso versus the dollar?
Well, yesterday, the volume was in the spot market. The country was $550,000,000 In the spot in the forward market, the ROACE was about $900,000,000 These numbers are below the average of the last, I would say, month or 30 days. The average in the spot was something around $700,000,000 Of course, what surprised was the jump with this kind of small volume. Right now, we are seeing some dollarization, but really nothing, I would say, out of the average. We have, of course, to monitor if the political environment gets better and people get calmer.
Right now, you don't see people in branches because you can do you can donerize your pesos just with a click with your either mobile or your computer. So but the volumes are really ordinary, nothing strange.
That's helpful. Thank you very much.
The next question comes from Gabriel Nobrega from Citi. Please go ahead.
Hi, Pablo, and thank you for the opportunity to ask questions. My question is sort of a follow-up to the previous question. Looking ahead, being that we saw quite volatile movements in the market yesterday, we're also seeing an increase of around 12% in the metabolic today. I would just like to maybe pick your brains and understand where do you think are the main challenges in these next 75 days until the elections? And if you are already thinking of any strategies that the banks couldn't take in these possible next few days?
And I'll make a second question afterwards. Thank you.
Okay. Well, what or in my opinion, the market reacted yesterday very negatively to the potential change in government. Basically, I think it was a big surprise because most of the pollsters were giving a very tight scenario. Even some polls were showing that Mercury could be winning either in 1st round or even in Bellota. So the difference between a lot of Fernandez and Mercury relief surprised everybody.
And in my opinion, because it's not clear what would be their actions or decisions if they are elected in October or November. So this uncertainty created this run on peso, the shares and also the country's premium jump considerably. I think one of the main variables to monitor is the effects because Argentine's think in dollars and if there is a lot of volatility in effects, people get uncomfortable or worried. We have many years of variable. And that affects inflation because there is, as we again think in dollars, there is a pass through to prices if there is movement in the effects.
It's not clear what percentage of any potential devaluation goes to prices and how quickly, but definitely it put pressures on inflation. So that in my opinion will be if the FX market is calm, it's a good signal that this period of time till the elections will be easier for the government to manage.
All right. That was very helpful. And as for my second question, I know it may be too early, but have you seen anything in terms of a deposit run? And do you think that there could be any worrying side from the bank if we actually see people running to take their deposits out of the bank?
No. As of what the numbers we mentioned are as of June, but we are seeing deposits in pesos growing, deposits in dollars. In our case, the number yesterday was $4,500,000,000 in the case of the bank, dollars inominated deposits measured in dollars And they are, I would say, quite stable. Of course, we are monitoring that very carefully, permanently, I would say. And we are, in my opinion, over liquid, even we took some measures like, for example, importing dollar bills just in case, we perhaps will have lower profitability, but we would we want to be very secure and comfortable with our liquidity, not only in terms of loan to deposits in pesos or in dollars, but also in terms of having the bills, the dollar bills in case there is some kind of run, as you mentioned.
But again, so far, no.
All right. Thank you for your answers, Pablo.
You're welcome, Pavel.
The next question comes from Ernesto Gabilondo from Bank of America. Please go ahead.
Hi, good morning, Pablo, and thanks for taking questions. My first question is, if you can share any color on the potential plans of Alberto Fernandez. I believe he has mentioned before he will honor the Argentine debt, but he has expressed again the Leliq before. So from your point of view, what does Alberto will likely do different from Macri? And how comfortable can we be that they will not come back to put the measures during the Kirchner's period, especially having Cristina running as Vice President.
Do you think the new government will want to make stronger again the state owned banks in Argentina? And on my second question is related to your strategy to protect the asset quality under this environment given your exposure in credit cards and that your reserve coverage ratio is at 100%. So under a more conservative approach, do you expect to increase the reserve coverage ratio? Thank you.
Okay. Hi, Ernesto. What I can say, I would say about Alberto Fernandez is what I heard from political analysts that met him in the past. But of course, these are opinions from 3rd parties. I would say that like a summary, if he said fairness from the city of Buenos Aires, I would say a little bit more intellectual, to put a name or word, not the typical guy from a province in the very far from Buenos Aires where some governors especially are like mini games.
Now. So this is, I would say, more intellectual, more open to dialogue, more in another word, democratic. And he's a guy that who you can speak with. And so and he has been saying that he will honor debt, that he will not do strange things that he wants, of course, to have a better economy in terms of consumption, SMEs and so on. But the thing is that in general, no politician is how they are going to do it.
The big, I would say, doubts and in my opinion, why the market reacts so badly is because in his party or coalition, there are many different, let's say, ideologies. And in the past, the decusiarism didn't take particularly orthodox measure. So that's why some people are a little bit worried. On the other hand, looking at the economy now, there are less degrees of, I would say, flexibility in terms of and now you have the IMF with a big financing package. Also, there are not many stocks inventories, I want to say, to sell or distribute.
And also the government, the current government improved what was the big swing deficits. Now we are closer to fiscal surplus and also the current account deficit is shrunk dramatically. So in this sense, the starting point would be easier. Of course, the big variable that is missing is inflation. That is, I would say, the main critic that the population makes to this government.
So I also read that some analysts are saying that the probability of Alberto Fernandez being more, I would say, market friendly is 70%. And on the other hand, like 25% or 30% would be being more influenced by the key reason. So that is, in my opinion, why there is this uncertainty. Going to the asset quality, we want to have the coverage above 100%. In June, at the end of June, NPLs at the bank were in the order of 4.6% in the case of Naranja at 12%.
In July, we saw some improvement due to the 13th salary, the aginaldo, and also some recovery in purchasing power. Now we have to see how the second half of the year evolves in terms of FX, inflation and the salary agreements. So in theory, there should be some flattening of the NPLs, and we were forecasting some improvement towards the end of the year. That must be monitored, but again, we are going to increase our provisioning in order to have coverage above 100%.
Thank you, Pablo. So just a follow-up. So just given this high inflation, do you think Alberto can use the state owned banks to lend if private banks don't want to do so? And in the second question, so given that the asset quality is improving, you don't see the reserve coverage ratio having to get up, right?
Well, in terms of what the let's say, again, the potential new government can do with the state owned banks is a question mark. Typically, they don't commit, I would say, suicide. They don't do stupid things and they have to fulfill all the regulations from the Central Bank in terms of capital requirements, reserve requirements and so on. So perhaps they could try to launch certain subsidized loans, but really, in my opinion, wouldn't be disruptive for the market at all. And again, if the asset quality deteriorates further in the coming months, we will be increasing the provisioning in order to or the cost of risk in order to keep the coverage above 100%.
That is our internal policy.
Perfect. Thank you very much, Pablo.
You're welcome, Ernesto.
The next question comes from Nicholas Riza from Bank of America. Please go ahead.
Yes, thanks, Paolo for taking my questions. Two questions. So the first one, when you look at the main trends in terms of credit growth, NPLs, they were already quite challenging even before what happened on Sunday, NPLs increasing, loan growth negative in real terms. How does the what happened on Sunday actually change your outlook for loan growth and NPLs for the second half of the year? How much worse does it make it?
And then second, it's probably a follow-up on previous questions, but in the past, Cristina's government, they did some measures which were negative for the banking sector, right, like putting caps on interest rates, floors on time on rates on time deposits, the directed lines for SMEs. Are you concerned about any of those measures coming back in a likely Alberto Fernandez administration? Thanks.
Hi, Nicolas. The credit demand or loan demand has been very soft, mainly because of the high level of interest rates. And we were all the banks in general were very conservative and still are conservative in granting and also the demand is very low, again, because of the high level of interest rate and also because of this soft economy. With the interest rates going down as we were seeing last week. We were beginning to see some kind of new origination.
Interest rates came back to very high levels. So we are not foreseeing any growth. We, of course, not growth. Actually, there will be a reduction in real terms in our loan book. And NPLs in part are deteriorating due to this because the denominator is not growing.
There is no net origination. So we could see some slight deterioration, but really loan to GDP was very low and today it's even lower. So really, there is not much room for further deterioration. Of course, we must monitor again inflation compared to salary increases and the evolution of the different sectors of the economy. We will, I would say, be able to comment on any potential measure once we know the measure.
In the past, yes, we saw some kind of, as you said, perhaps on certain interest rates or minimum interest rates on time deposits or subsidized lending to SMEs. In general, these were measures that had us an objective to, for example, to move the economy, to foster the economy, not really to make bankers' life more difficult. It was like a tool to try to foster the economy. And most of these measures were offset with other decisions that we took. We many times say that we can estimate the instant or potential effect on one relational measure, But what happens in the end is that we take other actions to offset these things.
Again, we cannot say if we are worried or what they could do. We need to see first that the government or the new opposition wins and then if they take any action.
Okay. Thanks, Paulo. Thanks very much.
You're welcome, Nicolas.
The next question comes from Carlos Gomez from HSBC. Please go ahead.
Hello, Pablo. I'm coming late to the call. So my meeting has been asked already. I'm asking about the very high level of the leak and very high level of NIM in this period. How sustainable is this into this year and next year?
And obviously, with all the uncertainty that we have today given that you are not growing the loans, but you are growing the Lalique. What would be a range of possible returns that you might expect next year relative to inflation? Thank you.
I don't know if I understood that because the line wasn't very clear. You asked about the level of the lease, how sustainable they are and yields going forward?
Yes, how sustainable the level of NIM is, more than LICs, the level of NIM. And also what type of return that you think that you can have in real terms, which is how you will publish it next year? And again, we understand it's very uncertain at this point.
Yes. Well, hi, Carlos. As I mentioned, as of June, we had about ARS 127,000,000 of Leliqs that made us have very high not only financial income from instruments, but also it had a very positive impact in terms of net income because the stock grew and also the yield increased. It's a stock that can change very quickly, and we are we have flexibility because every day there are 2 options. So today the number is below ARS 100,000,000,000 to give you an idea.
And the yield also is very volatile. In a year to cycle, what should be happening is that when interest rates go down, loan demand would pick up and there will be a shift from Leliqs to lending to the private sector. NIM for the quarter, including the Leliq, of course, because we are financing Leliqs with 10 deposits, was around 21%. It's abnormally high if the yield goes down to previous levels, not the 70 plus we are seeing today, more to the 50 plus we saw a couple of weeks ago. NIM definitely should go down.
But when NIMs compress, it means that volume is recovering. So it would be much healthy and better for us to have more volume with lower margins and not as it is the case today. Of course, this is a scenario with, as many of you mentioned, a very challenging macro scenario. The good news is that we are protecting profitability through this central bank paper.
What do we get normal level of NIM then?
Normal, it's hard. Yes. No. So 1 year ago, margins or I would say 18 months ago, margins were around 12% to 13%. It should go down to these levels, but we have to see how many quarters we need to get to these levels.
It will be a function of the effects and inflation, of course.
And the terms for next year?
And what, sorry?
Returns for next year, what does the bank aspire to have in 2020?
Well, our objective, I mean, in internal could be even higher this It could be even higher this year, but we are and next year, due to regulations, we will have to have all the numbers adjusted by inflation. So we will see just one enough or not nominal and adjusted by inflation. So the objective is to have, I would say, around or above 10% real return on equity.
Thank you very much.
You're welcome, Carlos.
The next question comes from Yuri Fernandes from JPMorgan. Please go ahead.
Thank you, gentlemen, for the pursuit of asking questions.
I have
the first one regarding the cost of capital you use internally. If you can comment what is the cost of equity you have for internal projects? And if you can also comment what was this cost of capital back in 2013, 2014, if you have some idea what you used to have in the past? So that's one. And my second question is regarding the effective tax rate.
I got you have inflation accounting here and that explained the benefit. But excluding inflation adjustment, what would be like the normalized effective tax rate for Galicia? Thank you.
Yes. Hi, Yuri. Well, I will begin with the last one. In this quarter, we made the calculation for income tax adjusting by inflation, the charge was around ARS 1,300,000,000. The inflation adjustment was around ARS 2,700,000,000.
So it would have been that amount higher the income tax if we haven't done the adjustment. That is because the income tax law said that if this year inflation is higher than 30%, we could consider the inflation adjustment for the calculation of income tax. As for the 1st 6 months, the accumulated inflation was 22.4%. We consider that it's impossible to have lower than 30% this year. And in terms of cost of equity, of course, we don't calculate it on a daily basis.
It's been very volatile, the country's premium. I would say on average in the last three years was closer to 12% in dollars, but definitely these days should be higher. And the consequence is that not new projects are analyzed. So we are not initiating any new project. We are in a more, I would say, conservative and wait and see mode.
The next question comes from Tunde Ojo from Harding Lovener. Please go ahead.
Hi, Pablo. How are you doing? Thanks for the presentation. A quick question for me is on the impact, any sort of impact you've seen in the banking sector and probably more relevant here at Dalicia in the last 2 days in terms of behavior of customers to this new political or economic responsibility. Have they I think my line of question is in 2 parts.
Have they sort of dollarized significantly? And apologies if you answered that question before. And number 2 is any sort of bank run like people putting money in safe box or taking money out of the banking system. Are you seeing any early signs of that yet or not? Thanks.
Hi, it's Andy. Well, I mentioned that the volume in the spot market yesterday for the country was $550,000,000 much lower than the average of the last 30 days that was about 150. Yesterday, the dollar grew from levels of 45 to 53. But really, people is wells on the rise. There are some estimates from the Ministry of Economy or even the Central Bank that around 83% to 25% of the assets of the private sector are in dollars.
So really there is not much room. And so far, we didn't see any, I would say, abnormal behavior. Of course, I would say, this volatility creates some worries. But again, it's so easy to dollarize. You don't need to hold the brands that the people can wait and see the price of the dollar.
It was very volatile yesterday. It is volatile today. So really, so far, nothing abnormal, I would say. And again, we took preventive measures in order to be even more liquid to have more dollar bills and not only in our safe deposits box, big one, but also in the different branches to avoid any potential, I would say, reputational damage.
Okay. Thanks.
You're welcome.
The next question comes from Carlos Gomez from HSBC. Please go ahead.
Just follow-up on the tax. So the adjustment that you made at €2,700,000,000 that refers to your tax liability of 2019, the current fiscal period. And that you have taken, so you are effectively using inflation accounting for the current period. You have not provisioned for it. So that has gone through the income statement.
Do we understand correctly?
Carlos, I cannot hear you clearly. Can you repeat, please?
Yes. Let me try
to repeat and be more clear. So right now, you have taken $1,300,000,000 in taxes. You have used inflation adjustment. And this is for the 2019 fiscal period. It is for the current period, right?
Yes.
So this is not an adjustment for 2019. This is for the current period and it is not also neutralized with the provision. You have actually taken this benefit through the income statement. Do we understand correctly?
Yes. The adjustment is for the 1st 6 months of this year. The income tax charge for the holding company was ARS 1,300,000,000. If we haven't made this inflation adjustment, it would have been closer to ARS 4,000,000.
All right. Thank you. And for 2018, you did not take an inflation adjustment, at least not to the company. You may have made a claim, but you have not you used normal company, right?
Yes. In year 2018, we didn't use inflation adjustment because the law said that we were or if inflation was higher than 55%, we could take that inflation adjustment. Last year, the inflation was around 47%, so we didn't make any adjustment. Of course, there is a parallel way that is to make a case with the local IRS, the AFFIT, and say that we think that there should have been inflation adjustment in previous years. But it's not considering in our numbers.
Okay. That's very clear. Thank you very much.
You're welcome, Carlos.
As there are no further questions signaled, I'll now turn the call back to your host for any additional or closing remarks.
Okay. Well, thank you, operator, and thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Have a good day. Thank you.
That will conclude today's call. Thanks for your participation. You may now disconnect.